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Clawback Provisions

  1. Why You Need to Consider Clawback Provisions
  2. Disclosure Regarding Clawbacks
  3. Recoupment Policies
  4. Practice Pointers
  5. Media Articles - Recovery of Past Compensation
  6. "Internal Pay Equity Methodologies" Practice Area
  7. "Rolling Back Compensation" Practice Area
  8. "Hold Until Retirement Provisions" Practice Area
  9. "Caps on Pay Elements & Total Compensation" Practice Area
  10. Litigation
  1. Why You Need to Consider Clawback Provisions

    Compensation Committees should reexamine the circumstances under which compensation may be denied or withheld or may be required to be returned in the event of certain conduct or other circumstances (e.g., restatement of financial statements). Provisions denying payment of severance and other compensation or benefits are familiar in the context of "for cause" terminations. 

    Provisions providing for the return of payments previously made are becoming more prevalent (e.g., "clawbacks" on stock option exercises if a non-competition provision is breached).  However, in light of Section 304 of Sarbanes-Oxley and the In re HealthSouth Corp. Shareholders Litigation [1] decision, Compensation Committees should consider other circumstances that could justify non-payment or givebacks of compensation or benefits.

    Under Section 304, the CEO and CFO must return bonuses and profits from the sale of issuer securities in the event of certain restatements of financial statements.  The recapture provision, which became effective on July 30, 2002, is quite vague and does not contemplate SEC rulemaking. 

    The court granted plaintiff’s motion for summary judgment in a derivative action by HealthSouth stockholders to rescind a transaction in which Richard M. Scrushy, HealthSouth’s former Chairman and Chief Executive Officer, repaid a $25 million company loan with shares of HealthSouth stock that were alleged to be overvalued.  The value of the shares was based on the market price for HealthSouth common stock on the New York Stock Exchange.  Scrushy represented that the stock market price was a reliable indicator of the value of the stock, which was largely based on the company’s certified financial statements, which Scrushy had signed.  Less than a month after the loan was repaid, the financial problems at HealthSouth became public, indicating that the financial statements were materially misleading.  The court ordered HealthSouth to return the shares it received from Scrushy and to treat the loan as reinstated from the date it was repaid with HealthSouth stock.  Scrushy was ordered to repay the loan’s principal and interest, along with pre-judgment interest.
     

  2. Disclosure Regarding Clawbacks  
  3. Recoupment Policies
  4. Practice Pointers
  5. Media Articles - Recovery of Past Compensation
  6. Internal Pay Equity Methodologies Practice Area
       
  7. Rolling Back Compensation Practice Area
       
  8. Hold Until Retirement Provisions Practice Area
     
  9. Caps on Pay Elements & Total Compensation Practice Area
     
  10. Litigation
 

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